Federal Reserve Plans to Revise Oversight Thresholds for Large Banks

NEW YORK/WASHINGTON, Sept 25 (Reuters) - The US Federal Reserve is developing a plan to increase the asset thresholds that necessitate stricter oversight for large banks, according to four sources familiar with the matter. This change could enable some banks to sidestep costly additional regulations and may encourage consolidation within the industry.

The central bank is expected to propose adjustments to the asset thresholds that determine which banks are subjected to stress tests and other stringent regulations, accounting for inflation and economic growth. Sources indicate that the Fed could unveil these changes later this year.

Currently, banks face enhanced regulatory requirements when their assets exceed $100 billion, with further escalations at $250 billion and $700 billion. Lenders argue that these thresholds, established in 2019, have not aligned with economic growth, leading to regulatory burdens that surpass the actual risks posed.

Meeting and maintaining the $100 billion threshold typically requires significant investments in compliance staff, risk management systems, stress-testing capabilities, and regulatory reporting infrastructure, often costing tens of millions of dollars annually.

The Fed is reportedly contemplating raising the highest threshold to approximately $1 trillion and adjusting the lower threshold to around $150 billion. Banks likely to benefit from these changes include U.S. Bancorp, Capital One, PNC Financial, and Truist, which are nearing the $700 billion threshold. This would provide them with more capacity to grow without facing the most stringent Fed oversight.

Western Alliance, Zions, and others could potentially expand beyond the $100 billion threshold without the full set of requirements that currently applies to banks in that category. Additionally, Pinnacle Financial Partners and a few others situated between $100 billion and $150 billion could reduce some obligations.

A spokesperson for the Federal Reserve declined to comment. In January, Fed Vice Chair for Supervision Michelle Bowman mentioned the possibility of reindexing thresholds, suggesting the use of nominal GDP, but there have been no further comments since then. A U.S. Bancorp spokesperson noted, "The US economy has grown significantly over the past seven years, and it makes sense to have rules for all banks that will help consumers and small businesses through increased bank lending capacity and more competition."